Trust in bonds as Inheritance Tax concerns rise
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Trust in bonds as Inheritance Tax concerns rise
By Mark Lambert, Head of Onshore Bond Distribution, HSBC Life (UK) Limited
Data shows a year-on-year rise to £8.25 billion for the 2024-2025 tax year marks another record for Inheritance Tax (IHT) receipts.1 Everything points to further increases in the years ahead too with the Office for Budget Responsibility (OBR)2 predicting IHT receipts will be £9.7 billion for the 28/29 tax year. The OBR predicted £8.3 billion for the 24/25 tax year so their forecast is unlikely to be out by much.
IHT is likely going to be an increasing issue for more people – the Institute of Fiscal Studies estimates that around 5.1% of deaths in the 23/24 tax year created an IHT liability and predict that will rise to 9.5% by 2029/30. That would be the highest level in 50 years. Clients can of course leave 10% or more of their estate to charity which will reduce the IHT rate from 40% to 36%. With nearly 1 in 10 estates liable to IHT, advisers need to look at a wider range of solutions.
Last Autumn’s Budget froze IHT thresholds at the current £325,000 until 2029/30. A married couple has a combined threshold of £650,000 and there is an additional transferrable main residence nil rate band of £175,000 per individual available when a home is left to children or other direct descendants. It also proposed bringing pensions into estates potentially creating an IHT liability, as well as a reduced Business and Agricultural Relief – all giving more people potential IHT liabilities.
As property values rise, more estates cross taxable thresholds. Rightmove data shows asking prices hit a record high in May 20253, while Savills4 estimates more than 700,000 UK homes are valued over £1 million, representing a 34% increase over the past five years.
The case for onshore investment bonds
Given the inexorable rise in IHT receipts, onshore investment bonds are becoming an even more important and effective core financial planning option in our view.
They are already established as tax efficient solutions for accumulation and decumulation when it comes to IHT planning for wealth transfers and can deliver valuable tax planning opportunities with no personal liability to Capital Gains Tax (CGT) or basic rate income tax on the bond gains. Fund switches within the bond are also exempt from CGT.
Up to 5% of the original investment can be withdrawn each year with no immediate tax charge until the cumulative amount reaches 100%. Amounts withdrawn are considered on surrender or death and gains above the 5% allowance can use top slicing relief, which can reduce the tax payable if policyholders move into a higher tax band.
HSBC Life (UK) research with advisers found nearly two out of three (65%) are now more likely to look at onshore bonds following the changes in the Autumn Budget to CGT and IHT.
The proposals to bring pensions into estates from April 2027 could likely mean advisers and their clients who had planned to utilise their pension as part of an IHT mitigation strategy will be reassessing this aspect of their planning. That could include taking tax-free lump sums and pension income as early as possible and reviewing their gifting and trust based investing to minimise these IHT liabilities.
Trust in bonds
Using an onshore investment bond as a trust investment can deliver attractive tax deferment and tax management alongside the tax benefits the onshore bond wrapper already offers.
HMRC research found that the two key reasons for creating trusts are a) to be able to control assets so they can be passed to children or grandchildren and b) as part of estate planning to protect family wealth against IHT.
Instead of surrendering a bond, the opportunity to assign it to a beneficiary, can be an attractive tax-efficient option. Onshore investment bonds are ideally suited to being used alongside trusts as part of estate planning adding yet another reason for looking at them as part of a range of tax-effective investment solutions.
Gift Trusts, for instance, are lump sum investments held under trust which enable the policyholder to give away a lump sum and reduce the estate for IHT purposes providing they live seven years from the date of the gift. In addition, any growth in the lump sum does not add to the estate and potential IHT liability.
A Loan Trust also helps to minimise the increase in their potential IHT liability – the client creates a trust and then lends money to the trustees who invest in a bond. The loan is repayable and any money left after the client’s death remains in their estate but any growth is immediately outside the estate.
A Discounted Gift Trust helps reduce IHT liabilities while providing fixed regular payments to the client setting it up. Their cash is invested in an investment bond with the discount part immediately regarded as being outside the estate while the rest also falls outside the estate if they survive seven years.
There are tools available to help advisers with IHT planning, one example being HSBC Life (UK)’s IHT Calculator. The IHT Calculator enables advisers to work out a client’s current and future potential IHT liability based on the options provided. Once complete, advisers can also create a PDF for a client summarising their situation.6 Please click here to view: IHT Calculator.
Sources
- 1. https://www.statista.com/statistics/284325/united-kingdom-hmrc-tax-receipts-inheritance-tax/#:~:text=Inheritance%20tax%20receipts%20in%20the%20United%20Kingdom%20amounted%20to%20approximately,in%20the%20previous%20financial%20year
- 2. https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/
- 3. https://www.rightmove.co.uk/news/house-price-index/
- 4. https://www.savills.co.uk/insight-and-opinion/savills-news/373662/number-of-property-millionaires-increased-by-34–over-the-past-five-years
- 5. https://ifs.org.uk/data-items/share-deaths-subject-inheritance-tax
- 6. Research conducted by Ad-Lucem with 300 advisers who were interviewed via telephone and represent 300 firms weighted to be geographically representative and representative in terms of AUA and number of RIs
- 7. HSBC Life UK’s IHT Calculator is designed to help financial advisers and their clients to find out the approximate IHT liability on a client’s estate, based on the information they provide. You should therefore ensure the information provided is accurate; if it is not the figures provided will be incorrect and should not be relied upon.
The HSBC Life Onshore Investment Bond is not designed for non-UK taxpayers, non-UK residents and short-term (less than 5 years) investors. The value of investments can fall as well as rise and your client(s) may not get back what they invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets. HSBC Life (UK) Limited cannot be held responsible for the investment performance of the HSBC Life Onshore Investment Bond. The value of any tax benefits described depends on individual client circumstances. Tax rules and rates may change in the future. HSBC Life (UK) Limited cannot be held responsible for any future changes in legislation.
HSBC Life (UK) Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England (United Kingdom) number 00088695. Registered Office: 8 Canada Square, London E14 5HQ. Our Financial Services Register number is 133435. HSBC Life (UK) Limited is a member of the Association of British Insurers.